The financial crisis demonstrated clearly that supervisory and regulatory practices must consider overall financial stability as well as the safety and soundness of individual firms, according to Fed Chairman Ben Bernanke.

Speaking May 5 at the 47th Annual Conference on Bank Structure and Competition in Chicago, Bernanke said that the Dodd-Frank Act requires regulators to mitigate the buildup of financial excesses and reduce vulnerabilities and, through a new interagency council, to monitor financial markets, identify emerging threats and help formulate policies to contain those risks.

“For our part, the Federal Reserve has restructured its internal operations to facilitate a ‘macroprudential’ approach to supervision and regulation and to monitor systemic risks,” Bernanke said. Macroprudential supervision and regulation aims to minimize the risk of financial disruptions that are sufficiently severe to inflict significant damage on the broader economy. The systemic orientation of the macroprudential approach may be contrasted with that of the traditional, or “microprudential,” approach to regulation and supervision, he explained, which is concerned primarily with the safety and soundness of individual institutions, markets or infrastructures.

“The explicit incorporation of macroprudential considerations in the nation's framework for financial oversight represents a major innovation in our thinking about financial regulation, one that is taking hold abroad as well as in the United States,” Bernanke said. “This new direction is constructive and necessary, I believe, but it also poses considerable conceptual and operational challenges in its implementation.”